Costing more

Here is a sample of services that will be taxed and remain exempt under Gov. Kasich’s proposal.

Services to be taxed

Services exempted

Pet grooming

Residential tax pick-up

Dating services

Child care services

Funeral services

Carpentry and other construction-based trades

Music downloads

Electricity, natural gas and water to residences and businesses

Tickets to the circus

Dance, tennis and golf lessons

More

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Economists agree Ohio will have to tax services to avoid higher sales tax rates in the future, but no state has cleared the political hurdles of that expansion in the past 30 years.

“It’s a matter of time before states have to expand their tax,” said Scott Drenkard, an economist with the conservative Tax Foundation. “Unfortunately, it’s something politically very hard to do.”

This past week, Gov. John Kasich proposed expanding the state sales tax to include services ranging from attorneys’ fees and lobbyists’ efforts to coin-operated video games and bowling. Some essential services, such as health care, rental properties and educational services, would be exempt.

The 30 percent expansion of items taxed would help fuel a reduction in the sales tax rate from 5.5 percent to 5 percent in a three-year period, a 20 percent personal income tax cut and a 50 percent income tax cut for businesses taxed as pass-through entities (mostly small businesses), according to the proposal.

Businesses set up as “pass-through entities,” in which business income is taxed as personal income, such as limited liability companies and partnerships, would not have to pay income taxes on 50 percent of revenue. The exemption is capped at $750,000 in revenue (a $375,000 deduction) to prevent large businesses set up in this way from receiving an excessive tax cut.

Whether these changes would represent a tax cut or a tax increase greatly depends on how the business is set up, whether it paid sales tax previously and what other services it uses.

The shift to a service-based tax is necessary because American buying practices have changed since Ohio’s sales tax first took effect in 1935. At that time, goods comprised 56.5 percent of expenditures in the United States, compared to 33.8 percent in 2011, according to Kasich’s proposal.

“It’s important for people to understand that the sales tax base is set up the way it is now because of an accident. The service sector is that blind spot in the sales tax base that has become greater over time,” said Carl Davis, senior analyst with the progressive Institution on Taxation and Economic Policy.

However, few states tax services; the last one to succeed in expanding the sales tax to services was South Dakota in 1979.

Since then, Michigan passed a $725 million tax on services in 2007, only to have the measure repealed before it took effect. The same year, Maryland’s governor tried to tax luxury services such as real estate management, tanning and health club memberships. Lobbyists picked off industries until only computer services remained, but the “tech tax” was dropped in 2008.

Sen. Bob Peterson, R-Sabina, said the economic principle of broadening the base and lowering the rate is a sound one, but he anticipates previously untaxed businesses might not see it that way.

“I’m sure there are industries and segments being taxed that are going to come in and share their thoughts on that,” Peterson said.

Rep. Gerry Stebelton, R-Lancaster, is one of several attorneys in the General Assembly whose services would be taxed under Kasich’s proposal. Stebelton said he wouldn’t have a problem paying a 5 percent tax on his hourly rate, but attorneys won’t like paying taxes on their portion of a lawsuit’s settlement.

“I can tell you, in no uncertain terms, there are groups of lawyers who are going to be opposed to this,” Stebelton said.

Ohio Chamber of Commerce officials have some concerns about how the sales tax expansion would affect their members, but they plan to hash out implications during the next few weeks, said Dan Navin, assistant vice president of tax and economic policy.

However, Kasich had a message for lobbyists who might try to exempt their industries: “I just want to make it clear when they win, the people of the state lose. When they win, the tax cut comes down.”